The Hindu Business Line : Crouching penalty, hidden losses

A FIRST-rate controversy has been generated with regard to the levy of penalty in cases where loss is declared in the return and, on completion of the assessment, the assessing officer (AO) finds that the loss has been overstated deliberately or by design.

The question was whether any penalty can be levied for concealment at all in such cases because the net effect of the computation on completion of assessment will still be a loss and there will be no tax leviable.

The Revenue sought to argue that there was detection of concealment by the AO and inaccurate particulars had been furnished which called for the levy of penalty.

Section 271(1)(c) of the Income-Tax Act, 1961 deals with the levy of penalty for concealment of income.

Under this section, the minimum penalty will be 100 per cent and the maximum 300 per cent of the amount of tax sought to be evaded by reason of concealment or furnishing of inaccurate particulars of income.

How to interpret the phrase "the amount of tax to be evaded"?

This was defined in the newly introduced Explanation 4 to Section 271(1) for the purposes of Section 271(1)(iii) which took effect from April 1, 1976, by the Taxation Laws Amendment Act, 1975.

Under this Explanation, the quantum of penalty is linked with the amount of tax sought to be evaded.

Punjab positive

The above provision was interpreted by several courts, holding that if no tax is payable, then penalty provision is inapplicable and the question of invoking Explanation 4 does not arise.

The Punjab High Court, in CIT vs Prithipal Singh (183 ITR 69), observed that the word `income' refers to positive income only.

It, therefore, held that Section 271(1)(c) is attracted only in the case of an assessee having positive income, and not loss, as the question of concealment of income to avoid payment of tax would arise only in the former case — that is, when there is no tax payable, the question of any penalty does not arise.

The Department's appeal against this decision was dismissed by the Supreme Court (249 ITR 670 SC).

However, a contrary view was taken by the Karnataka High Court in P. R. Basavappa and Sons vs CIT (243 ITR 776).

In Atul Kumar Devorat and Co vs CIT (1987 168 ITR 286), the Calcutta High Court upheld the levy of penalty under Section 271(1)(c) in respect of the claim for loss on purchase and sale of shares which was not allowed in the assessment proceedings.

Amendment to the law

The Finance Act, 2002 amended Section 271 and declared that reduction of loss will also attract penalty.

The issue was considered by the Bombay High Court in CIT vs Chemiequip Ltd (265 ITR 265). Upholding the levy of penalty in the light of the amended law, the Bombay High Court observed: "This amendment is clarificatory in nature".

Special Bench

One would have thought that the controversy had ended with the Bombay High Court ruling. At this stage comes the ruling of the Special Bench of the Income-Tax Appellate Tribunal, Ahmedabad, in the Asst. Commissioner of Income Tax vs Apsara Processors (P) Ltd., (2005 92 Ahmedabad SB 645) case.

The Tribunal ruled that the amendment of 2002 was only prospective and would not govern assessments prior to 2003-04.

The normal presumption is that the amendment is not retrospective unless provided otherwise, expressly or by necessary implication. The law prevailing at the time the return was filed should apply and penalty is not leviable if the assessment resulted in a loss.

Subsequent amendments cannot fasten the liability of the penalty unless the legislature expressly provided for the same.

It cannot be said that the amendment was clarificatory and, therefore, retrospective in operation.

The Legislature did not intend to effect retrospective amendment. The Bombay High Court did not take into account the Supreme Court dismissing the Revenue appeal in the Prithipal Singh case.

From here, where?

The Bombay High Court ruling in CIT vs Chemiequip Ltd is the only judgment of any High Court on the point and should normally be binding.

The Special Bench of the Tribunal, however, has given weighty reasons for not following these judgments.

This can mean that in Maharashtra and Karnataka, penalty for concealment can be levied even in cases of reduction in loss, while in Gujarat, the Special Bench's ruling will apply and no penalty can be levied in loss cases. And that in other States, it would be an open question. Therefore, it should be interesting to know the Supreme Court's view on the matter.

(The author is a former Chief Commissioner of Income-Tax.)

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